Investopedia: Overheated Expectations Send Rackspace Investors To The Torture Chamber

Successful investing demands a careful balance between confidence in your own subjective analysis and a willingness to acknowledge that you may be wrong. When I last wrote on Rackspace (NYSE:RAX) back in February of 2012, I thought the stock looked overpriced and was trading far more on the mania over all things “cloud” than on credible projected cash flow streams.

What I didn't mention at the time was that my fair value was less than half of the current stock price. Such a dramatic difference of opinion with the market led me to revisit the numbers repeatedly, and things didn't look so good for that call as the stock climbed into the high $50s, came back down into the $40s, and then rocketed up to the high $70s earlier this year. Then the worries about growth, competition and margins started to take hold – leading to a nearly 50% drop to today's price just below $40 (as of this writing).

As it sits today, my concerns about Raxspace really haven't changed. While I believe gross demand for managed hosting and cloud platform services will be strong, I believe Rackspace will be hard-pressed to create any sort of economic moat in this market or produce the sort of free cash flow necessary to validate even today's lower share price. I continue to appreciate why investors like Rackspace as a play on cloud and outsourced services, but I fear Rackspace will be laid low by commodity-like profitless prosperity.

Read more here:
http://www.investopedia.com/stock-analysis/050913/overheated-expectations-send-rackspace-investors-torture-chamber-rax-amzn-goog-ibm.aspx